Wells Fargo & Co.'s new retail-banker reward guidelines, replacing the branch-staff bonuses that created the perverse incentives exposed last year, should relieve workers and investors -- but the bank still faces "many large issues" about how much could have gone so wrong for so long at the nation's largest branch system, writes bank analyst R. Scott Siefert, in a report to clients of Sandler O'Neill Research, New York.

The bank ended its old cash-for-customers program after last year's disclosure that thousands of staff at Wells Fargo's 6,300 offices, the nation's largest bank-branch network, were fired for abusing the system and setting up phony accounts. The bank's willingness to tolerate this chronic abuse, instead of tightening scrutiny and avoiding fraud, cost CEO John Stumpf his job.

Read Wells Fargo's propaganda on the new guidelines here.  Highlights:
"1. No product sales goals...
"2. Performance will be based on customer service, customer usage and growth and not simply opening new accounts...
"3.  More metrics will be weighted towards team (branch) goals rather than individual goals...
"4. Additional Oversight. There will be controls in place to monitor bad behavior, including more proactive monitoring and additional oversight at the regional and corporate level.
"5. There will be periodic reviews and checkpoints to monitor any unintended outcomes or behavior prompted by the new compensation plan."

More incentives will be tied to "direct customer feedback
and product usage," and to measurements "that take a longer view of the customer relationship" including "exceptional customer experiences."

That means branch-worker bonsues will get more complicated:
  - "A larger percentage of total compensation," including "entry level" pay, "will be comprised of base pay versus variable incentives...
  - "Management practices emphasize observations and balanced judgement of each team member...  Additional centralized monitoring, reporting and controls [should] provide enhanced oversight...
  - "New business success metrics" in branches and districts will include: "Primary Customer Growth," "Household Relationship Balance Growth," "Branch Management Risk Score," "Qualitative assessments" of "teamwork, risk management and the 'how'" of meeting goals.

Wells Fargo will spend "mystery shoppers" to spy on branch workers, and add "local, regional and corporate oversight," instead of the old branch-based, immediate-gratification awards.

How's that going over among bank investors, who battered Wells Fargo shares last fall?

"Work on this initiative has been a priority" for new community-banking chief Mary Mack, writes analyst Siefert.

"As expected, the new plan eliminates sales goals," balancing "team" account growth with customer service and usage metrics. Fixed pay will be more important than bonuses. 

The new plan reduces stress on employees and should relieve skeptical investors a bit, Siefert adds. But "many large issues remain. For instance, we still do not have the results of the Board of Director's internal investigation into the account scandal, and business disruption is still a work in progress.

"As for the stock, we are keeping our HOLD rating. On the one hand, we are naturally attracted to this highly profitable story," especially at Wells Fargo's depressed recent share price.

"But as we have said before, given that cross-sell has been the singular dynamic that investors have considered the cultural differentiating factor for this company (for the better part of a quarter century), our sense is that this story will have to be in many ways re-invented." 

Siefert expects to learn more with the bank's Friday's earnings report, which he expects will be a couple of cents short of the fourth-quarter consensus that Wells Fargo will earn a dollar a share on "decent loan growth" despite "slowing" mortgage loans by the bank's vast home lending business.